In a recent article about the Swiss watch glut, commentator Will asked “If there’s a glut, where are the watch discounts?” We at TTAW believe the question deserves a thoughtful answer. First, it’s important to understand the limits of supply and demand economics . . .
We all know the role that supply and demand plays in pricing. Supply curves slope upward, demand curves slope downward. Wherever the twain shall meet is what you’ll pay. This is such a simple and powerful rule that it works pretty much everywhere. However, how it works is intimately bound up with the mechanics of the particular market.
The law of supply and demand can exert an extremely strong and obvious influence on price. For some goods and services, changes on either side of the equation create an immediate price change. But the effects of reduced or increased supply or demand can also be stymied or opaque. Various mechanisms can prevent pricing from adjusting immediately or completely.
Simply put, simpler and more fungible goods create more liquid markets and the stronger version of supply and demand. There’s a reason economics textbooks use a commodity like grain or oil to illustrate these concepts. When you can freely substitute one good for another the market is going to be fully liquid; it quickly achieves a “market clearing” price. Think about how hurricanes change gas prices.
As products get more differentiated from each other the substitutability falls. Pricing becomes more dependent on inherent values of the good, rather than pure supply and demand.
When it comes to luxury goods like Swiss watches, there are a host of factors that come into play: pricing and distribution policies, geographic factors, fashion, media coverage, etc. Using pure microeconomics to determine “what the market will bear” is like looking through a dirty glass – the view is distorted compared to a simple commodity like oil.
One thing’s for sure: there have been Swiss watch gluts in the past. The financial crisis of 2008 is the most famous. The crash in demand led to some extreme behavior by manufacturers, such as Richemont’s decision to buy back and destroy unsold inventory (a practice it repeated as recently as a few years ago).
Many watchmakers pushed their inventory into Mainland China, which weathered the crisis better than any Western economy. This was a great strategy – until Xi cracked down on corruption. Swiss exports to the Mainland and Hong Kong plunged. (That affair is an article in itself).
The COVID-19 pandemic led to an unexpected, unanticipated global shutdown of the entire watch market, leading to a substantial oversupply. Despite ceasing production and slowly returning at reduced levels, demand has not yet caught up with supply (assuming it will). Which brings us back to Will’s question: if there’s a watch glut, where are the watch discounts?
The first thing to know: luxury manufacturers hate watch discounts. Discounts to the public detract from the product’s prestige. Watchmakers will do nearly anything to avoid them – or at least avoid the appearance that they’re providing them. They employ various strategies to keep official discounts at bay.
First: they push excess inventory onto dealers. We talk a lot about this at TTAW, for good reason. The practice is an evergreen. By withholding allocation of desirable pieces, manufacturers make dealers eat excess inventory. Then it’s the dealer’s problem; the dealers either holds onto pieces until they sell or . . . discount them.
Dealers tend to offer customers discounts sotto voce. Once they establish you’re a serious buyer, they close the deal by offering you a piece at a price significantly lower than MSRP. That’s nothing you’ll ever discern by looking in the window or scanning the dealer’s website (policed by minimum advertised pricing rules).
Unofficial dealer discounts are still the most common method for dealing with gluts. That said, the rise of the other strategies has made it a less prevalent practice
The second strategy (one manufacturers are practicing now): hold pieces back. The manufacturer’s markup to their retailer is around 100 percent plus. Not selling a watch at $20k is a much smaller hit to the manufacturer than it appears at first glance.
What happens to these watches? Sometimes they’re put aside to be released later. Many times they’re pulled apart. Movements end up in different/newer cases and everyone is happy. Eventually.
In a bad year – and this has been a very bad year – watch manufacturers hold allocations back to prevent a glut. Either that or they quietly buy back pieces from their wholesalers or dealers to make sure that the price doesn’t crash (a la Richemont).
Dealers are happy to sell a piece back to a manufacturer. They can use the good will engendered with the manufacturer to secure in-demand watches. The watchmaker either relocates the unloved watches geographically or, again, tears them down for parts for more popular ones.
Finally, most importantly, dealers use the secondary market to offload excess inventory.
A few weeks ago we talked about the “importance” of the secondary market. Despite WatchPro’s insistence that the secondary market is for “data and research,” it is absolutely used to dump excess inventory.
TTAW has done some digging. We know for a fact that some manufacturers are either pushing pieces on to the secondary market themselves or through trusted third parties, condoning dealers and/or wholesalers to tap the secondary market on their behalf.
Since these are not “new” sales, the manufacturer maintains a level of plausible deniability. And while shuffling new watches onto the secondary market might hurt “collectors” or “investors,” the manufacturers don’t give a fig about these people. They’re happy to get their pieces in the market – as long as they don’t compete with dealer or direc-to-consumer prices.
To see how this works, let’s check in with a manufacturer that doesn’t have a glut. Here’s Rolex’s current availability on Chrono24:
See that? Some new pieces, a lot used. That’s exactly what you’d expect from a functioning market. Now let’s look at crosstown rival OMEGA.
What about Tissot?
This is a fairly crude metric. But well functioning markets do not have the majority of their inventory on secondary sites as new/unworn.
So where are the discounts? They’re right there! The Longines HydroConquest retails at $1,600. Chrono24 has them for 20 percent off, all day. Can you get a box fresh OMEGA Constellation in steel for 25 percent off? Yesiree Bob! And so on.
If you’re looking for easy access to new watch discounts, you’ll find them on the secondary market. Sure you’re sacrificing the manufacturer’s warranty, and you’re not going to find a new Rolex Submariner for a discount. But a market where brand new pieces are going for 25 percent below retail reveals a significant glut. A broken market.